Enlightenment Through Understanding

HBD-as-Destiny Thesis (part 5 of predicting series)

That so obvious, inevitable web 2.0 ‘bubble’ just refuses to burst. Valuations refuse to fall despite so many pundits predicting they would.

The past seven or so years, every single thing that the media called a bubble, they got wrong. That includes the post-2008 bull market, Facebook stock, Amazon stock, Bitcoin Uber, Tesla stock, Bay Area home prices, and on and on. The media owes everyone an apology for getting everything so wrong.

It sounds arrogant to say, but my best investing advice is to ignore other people’s investing advice. So the question is, how do I know I’m so certain? It’s one thing to be right once or twice, but when you do it over and over again and for so many things, maybe there is an underlying skill/strategy involved. Sometime things don’t make sense on the surface, but you have to accept them as reality. Why is Bitcoin still so expensive despite the media for the past 6 years calling it a bubble? Is it possible for only 5 companies (Apple, Microsoft, Google, Amazon, Facebook) to run an entire economy? How come it seems like America is on the verge of civil war, yet there is also so much complacency too?

There are two themes: HBD-as-destiny and winner-take-all post-2008 capitalism.

Regarding the latter, VC funds are having trouble making good returns. The market only cares about companies that have the potential to become the next Tesla, Facebook, Amazon, etc., so unless you’re in a this very special and exclusive niche, exiting (which means a large buyout or IPO) is very hard. It’s not like in the 90′s when all tech sectors did well…now it’s just social networking, apps, Tesla, and Uber. A very lopsided, winner-take-all market. In a post-2008 world, only very few companies and sectors do well, and the out-performance of maybe a couple dozen companies is enough to lift the entire stock market and economy higher. Such companies include the ones I have been recommending on this blog for years: Amazon, Facebook, Google, etc. Nearly a decade later, no one has been able create a viable competitor to these companies and likely never will. That’s not to say it’s impossible, but it’s very improbable.

For the former, HBD-as-destiny means that while low-IQ sectors, regions, and industries often go from rich to poor (and then stay poor for decades), high-IQ sectors, regions, and industries, permanently stay rich. This means Facebook, Bitcoin, Amazon, Web 2.0, Uber, Silicon Valley, Tesla, Manhattan and Bay Area real estate, Nasdaq, etc…all these things will keep going up, due to IQ. Low IQ regions (Detroit, Turkey, Puerto Rico, Brazil, St. Louis, Baltimore, Chicago, etc.) will likely remain poor forever, or at best, in an oscillatory state between rich and poor. High-IQ regions, companies, and industries don’t oscillate; rather, there are pauses and then unexpected sudden bursts higher, sorta like a stairway. Unlike the oscillatory pattern, there is minimal or no give-back of earlier gains.

For a more technical explanation, low-IQ industries, such as manufacturing and retail, don’t have a high per-capita output, which limits the density/concentration of wealth. For low-IQ sectors, the value per employee is very low, whereas with high-IQ sectors it’s very high. The result is that for low-IQ regions the wealth is spread out rather than concentrated, and this limits real estate prices and makes the area less desirable. Not surprisingly, there is also higher crime in low-IQ regions. High-IQ regions attract capital inflow from rich foreigners, which is one reason why Silicon Valley and New York not only became so wealthy but stayed wealthy. Low-IQ regions are dependent on domestic inflows, which tend to be less reliable. For these reasons and others, that’s why Manhattan and Silicon Valley cannot become Detroit.

A third factor is corruption, a culture of laziness, and an overall economic climate that isn’t conducive to capitalism. This is the problem with Spain, Japan, France, Italy, and Russia, which aren’t low IQ but are basket cases in other ways.

But also, low-IQ industries and companies tend to have poor management (high time preference due to low intelligence) and are very sensitive to both micro and macro factors, as we saw with the decline of the domestic auto industry in the 80′s, the decline of the energy and steel industry in 2008-2009, the decline of the fracking/drilling industry in 2014-2015, and the decline of the housing/construction industry in 2006-2008. When times are good, these poorly-manged companies will take on tons of debt to expand, only to get crushed by the debt when the market contracts. Tech, consumer staples, and healthcare companies don’t have the same debt problem as manufacturing, low-IQ retail, and energy, and due to high-IQ management, these tech companies don’t take on debt to expand but instead rely on organic growth.

Leading up to the 2008 crisis, the MBAs running these banks were oblivious to the threat of subprime; it was the actual quants in STEM fields that crunched the numbers, who knew the risks but no one listened. But in the case of Silicon Valley and hugely successful companies such as Google, Tesla, and Facebook, engineers make all the important important decisions, not MBAs.

But what about 2000-2002 dotcom crash, in which many high-IQ tech companies failed. However, high IQ is a necessary but still insufficient condition. The first criterion, strong fundamentals and market dominance, is also needed. The tech boom had two phases 1990-1995 and 1995-2000. During the first phase growth was strongest, but the second phase saw slowing growth but soaring stock prices, which was not sustainable. Microsoft, Cisco, Oracle, AOL, etc. all had slowing growth by the late 90′s, whereas today growth is not slowing for Amazon, Google, and Facebook but is actually accelerating. Also, interest rates were 6% in 2000 versus .75% now, so stocks were comparably much less attractive than bonds. If earnings are flat (which they were in 2000), dividends are only 2%, but a risk free bond gives 6%, the choice almost seems obvious. Also back in the late 90′s to early 2000′s, the internet was chaotic and dispersed…there were about seven major search engines (Alta Vista, Yahoo, Lycos, MSN, Google, Ask Jeeves, etc.), five or so major online retailers (Amazon, Ebay, Overstock, eToys, etc.), etc. Now it’s just Google and Amazon, both having long ago established market dominance. In 2004-2006 there were many social networks (Classmates, Friendster, Myspace, Facebook, etc.), but the market soon consolidated, with Facebook (and Instagram, which Facebook owns) the overwhelming winner. High IQ+ huge profits+ huge growth+ market dominance is an impossible to beat combination.